Econ 101 on the Kudlow Report

RUSH: Last night on the Kudlow Report, CNBC, spoke to Alan Reynolds, Cato Institute senior fellow. Kudlow said, ‘You’re saying that the stimulus is raising unemployment, and I think you’re saying longer we have unemployment, the compensation benefits, the worse the unemployment rate gets. Is that right?’

REYNOLDS: Absolutely. I quote the Federal Reserve. The latest FOMC minutes, say, probably added at least a percentage point, the extension of unemployment benefits. Punched it up. Larry Summers himself said unemployment is about one and a half percentage points higher than we can explain by the usual GDP figures. Alan Krueger in the Treasury department has done research on this subject. The OECD says the evidence is totally clear. Look, if you subsidize something you get more of it. We are subsidizing very, very, long extended periods of unemployment. And we’re getting what we paid for.

RUSH: Duh! Duh! You subsidize what you get you’re going to get more of it. Same thing. If you tax more of something, you’re going to get less of it. If you tax something less, you’re going to get more of it. Economics 101. Free market 101. Kudlow says, ‘Well, we used to have unemployment benefits for six months. Now it’s, what, 18 months?’

REYNOLDS: It was 18 months until November, and what we’re dealing with here is an extra 13 weeks, which takes it out to almost two years. So we would be rolling back, and only in a couple dozen states, because this only applies to states that have very high unemployment. In a couple dozen states you would have to go back to only 79 weeks of unemployment benefits. My data may be slightly out of date, but Canada had a maximum of nine months last time I looked in a 2007 OECD report, Sweden was 14 months, Britain was 6, Japan was something like 10. I mean this is an unusually long period, and it basically, it gets people to not leave Michigan, to not leave California and go to Utah. Utah only pays 46 weeks, they have an unemployment rate of 6.7.

RUSH: Well, I like hearing that, that backs up something else I’ve always said and that is most of the limitations that we have in life are self-imposed. For example — I’ll just use myself. There is no way that I would have realized my career dreams if I had decided to stay where I was born. Too small a town. It would not have happened. I had to leave, had to move. Now, some people don’t want to, some people to want stay with their families and friends and so forth, that’s totally fine. But it’s a limitation if what you want to do is not there, if the opportunity to be the best at it is not there. This is a great example of a great education here today on this program, costing you zilch. Finally, Kudlow says, ‘You say the Fed has acknowledged all this in print. You say the Organization for Economic Development has said the same thing. So why do Republicans and Democrats in Washington keep extending unemployment benefits, except for Jim Bunning? Why do they keep doing it?’

REYNOLDS: I think it has to do with natural sympathy. I mean you want to help people who are in trouble and one can make an argument that, well, if they have a little more time to look they might get a better job. We’re talking two years, there’s just an awful lot of research that says the intensity of job search really picks up in the last four weeks or so before the benefits run out. The benefits are in — in California, it’s $4.75 an hour, it’s about $25,000 a year, that’s my salary, that’s serious money, and in New Jersey it’s closer to $30,000 a year. If somebody else in the family is working you just are not in a real big hurry to get off of that gravy train. Plus you’re likely to lose Medicaid, other benefits, some health benefits and some housing benefits, perhaps, food stamps.

RUSH: I knew I’d heard this somewhere. Alan Reynolds there has just said that in New Jersey it’s $30,000 a year on unemployment benefits, and if you have two people in the house unemployed that’s $60. You’re not in a big hurry to get off the gravy train. If you do you lose Medicaid or other benefits, food stamps and so forth. All makes sense. So finally Kudlow says, ‘The 90% working are financing the 10% unemployed out to two years. Is that what’s happening here?’

REYNOLDS: Yeah. And it’s really getting to — the balance is tilting pretty badly. The ratio of transfer payments including Social Security, Medicaid, is now 40% as large as all private wages and salaries combined.

KUDLOW: Wow.

REYNOLDS: The amount of individual income tax was barely even with the amount of transfer payments, federal and state, that were paid out last year, about $2.1 trillion. We’re reaching a tripping point where those who are doing the paying in and those who are taking out, I mean it makes a lot of people want to step over the edge and join the other camp.

RUSH: And there’s a story in the Washington Times today about how never before have as many Americans been dependent on the government for their daily existence as they are today. It’s at an all-time high. And make no mistake, that’s by design. We’ve been headed this way ever since FDR and the New Deal, and this has been the objective of it. The theory is that all these people are going to vote for whoever keeps the money flowing, and that’s Democrats. That’s been the theory.